Coase on the problem of modern economics

In the 20th century, economics consolidated as a profession; economists could afford to write exclusively for one another. At the same time, the field experienced a paradigm shift, gradually identifying itself as a theoretical approach of economization and giving up the real-world economy as its subject matter. Today, production is marginalized in economics, and the paradigmatic question is a rather static one of resource allocation. The tools used by economists to analyze business firms are too abstract and speculative to offer any guidance to entrepreneurs and managers in their constant struggle to bring novel products to consumers at low cost.

This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.

Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates.

I can see how you might argue that economics has lost its relation to economic reality, but I can’t see how that fact by itself means that ‘government is increasingly seen at the ultimate solution to tough economic problems’

Its not as if government is full of economists trained in anything other than what other economists are trained in.

The rot set in with the Samuelson-isation of the profession. Economists stopped working on an intuitive basis and wholeheartedly embraced mathematical formalism. A good grounding in mathematics certainly helps an economist, but it has almost become an end in itself rather than a tool for enlightenment. The other thing is that ‘the social planner’ is the starting point for many models and the state is readily substitutable for markets, which is of course absurd.

Economics thus becomes a convenient instrument the state uses to manage the economy

One of the newly minted members of the Chinese Politburo Standing Committee is the economist Zhang Dejiang. He studied economics at the Kim Il Sung University in North Korea. No doubt he will be keen to test his practical economic management on the most capitalist country in the world, China.

Coase liked to quote this quote of Alfred Marshall in his writings on Marshall:

(1) Use mathematics as a shorthand language, rather than an engine of inquiry.
(2) Keep to them till you have done.
(3) Translate into English.
(4) Then illustrate by examples that are important in real life.
(5) Burn the mathematics.
(6) If you can’t succeed in (4), burn (3).
This last I did often

I got a first hand taste of this last year when I watched an entrepreneurial brother and a business prof brother have a conversation on business. The prof thinks the models are the economy and has always had salaried jobs. Doesn’t understand how brother the entrepreneur ended up with a beach house. After all he was always the better student. And describing how a business could actually grow didn’t seem to interest him at all.

Then the prof said that the US economy would improve with more Keynesian aggregate demand. I bit my tongue and poured myself a glass of wine instead. Later I asked the prof what he thought of the Austrians. He said he had no interest in their work because it was “every man for himself.”

Sad because he trains students who think they now know Business and how Economies work.

I don’t get the lack of interest in the real world. Coase said it well.

Robin, Economists at Business schools take great interest in how the world works.

The economics of business finance such as by Fama dates from the 1960s. The massive index-link investments funds industry that includes Vanguard is based on the efficient market hypothesis they you can’t beat the market.

Ed Lazear invented personnel economics because his MBA labour economics students were falling asleep in his classes.

Luke Froeb stopped his MBA students from falling asleep by reframing market failure as a business opportunity. There was profit to be had from being first to fill the gap in the market or from being maker of the missing market.

Maybe some places Jim but I am shocked at what I am also hearing from students. Most of my eldest’s peers are now Juniors and they know I adore economics and figuring out what makes a business work or not. Those majoring in eco at big name schools or Industrial Engineering are all studying models that are not connected with reality. Or even good history.

One was telling me what he had learned in his classes while I was making dinner. I just said “You do know that is not the kind of analysis any successful businessman would use, don’t you?”

“But I will have my degree” was the reply.

We have so many worthless degrees now all over the world.

Don’t you think economics is in danger at many universities of becoming like an education degree? Individuals are credentialed but most of what they have been taught isn’t so. And most of what matters, they were never taught.

I still am astounded that a PhD with a specialty in production and supply management would have no interest in nailing down the chance to discuss the real variables and choke points. A real life lab chance and the models are a better fit to how profs want to see the world?

Then the students are more hobbled than enriched by the interaction unless the point is really to help them read and write analytically at all.

My economics lecturer for my post grad used to explain the flaws as she saw it for economic models. She was from a business background.
She left a few years after I graduated, the rumour being that she had lied about her qualifications…..

Don’t you think economics is in danger at many universities of becoming like an education degree? Individuals are credentialed but most of what they have been taught isn’t so. And most of what matters, they were never taught.

Economics is NOT in danger of becoming like education degrees where what is taught isn’t so and what is so isn’t taught. Economics, as taught in Australian universities, reach that point a long time ago!!